The Nuts and Bolts of Collateral Descriptions in British Columbia
By: Mike Todd and Julia Winters
To obtain effective security over personal property, a lender must describe the collateral subject to its security interest in both its security agreement with the debtor and in its registered financing statement. This article will focus on the requirements for proper description of collateral in financing statements in B.C. (and most jurisdictions in Canada other than Ontario), and is a reminder to those in Ontario that B.C .does not have a "check-the-box" system for describing collateral in financing statements. Instead, lenders in B.C. must comply with stringent requirements for describing collateral in the BCPPSA1 and the regulations under that Act.
The B.C. Supreme Court judgment in Alda Wholesale 2 states that one of the primary purposes of the BCPPSA is "to give notice of the nature of prior security to a ... creditor" so that it will know "whether the collateral is the same as the collateral over which it is also seeking security."3 It also states that the "integrity of the registration system is best promoted if those filing financing statements are accurate in their descriptions."4 If a lender fails to adequately describe collateral in its financing statement, its security interest will not be perfected against some or all of the collateral, resulting in a potential loss of priority against third parties such as other secured creditors, purchasers or trustees in bankruptcy.
How to Describe Collateral
The regulations to the BCPPSA provide numerous detailed rules on describing collateral in a financing statement. If a lender takes a security interest in all personal property in which the debtor has or may have an interest, the financing statement should describe the collateral as "All of the debtor's present and after-acquired personal property", sometimes referred to as "all PAAPP."5
Alternatively, if a lender takes a security interest in either a specific item of property (e.g., "100 shares in ABC Ltd."), or in a "kind" of property (e.g., "All shares and other investment property"), the lender must describe the collateral by item or kind in the financing statement.6 An "item or kind" description should also refer to after-acquired property if it is subject to the security interest (e.g., "All present and after-acquired shares and other investment property"). If after-acquired property is not referred to, it will not then be included in the collateral charged.7
Three categories of goods frequently used to describe collateral are inventory, equipment and consumer goods. An example of the minutiae of the BCPPSA is that describing collateral as "inventory" is acceptable, but only while the debtor actually holds the collateral as inventory.8 If the debtor's use of the collateral changes from being classified as its inventory, the lender will lose its security interest in that collateral unless the new use is already covered by the collateral description. By contrast, a description of collateral as "consumer goods" or "equipment" is inadequate without further reference to the kind of collateral (e.g., "computer equipment").9
For goods described in the regulations as "serial numbered goods", the lender should provide a description by serial number to obtain the highest priority for its security interest. In B.C., these goods are not limited to motor vehicles, but also include other mobile goods such as boats, aircraft, trailers and manufactured homes. However, they do not include other non-mobile goods simply because they have serial numbers.10
In any description that is not "all PAAPP", a lender must describe not only the original collateral, but also proceeds that may arise from dealing with that collateral. While a security interest automatically extends to any proceeds derived from dealing with the original collateral, to obtain the same priority status against the proceeds (except for certain limited categories of proceeds such as money or cheques) as the original collateral, a financing statement must contain a description of proceeds that would be sufficient to perfect a security interest in original collateral of the same kind.11 Since a lender cannot predict what proceeds might arise from dealing with the original collateral, a generic proceeds description is most often included in the financing statement, essentially claiming an interest in any kind of personal property that may be proceeds.
Finally, it is important that the description of collateral in the financing statement be grammatically clear. In Alda Wholesale, a creditor lost priority because a misplaced modifier made it unclear whether the security extended to all of the debtor's vehicles or only those vehicles that were leased by the debtor from the creditor. This lack of precision made the entire description "seriously misleading" and invalid.12
Describing collateral in a B.C. financing statement may seem easy, but the rules are complicated and mistakes can be costly. So despite the rush that can accompany closing a transaction, care should be taken in what is often the final step in perfecting a lender's security interest. This will ensure that the lender achieves its expected priority position against the collateral given as security.
1. Personal Property Security Act,
RSBC 1996, c 359 ["BCPPSA"].
2. Alda Wholesale Ltd. (Trustee of) ,2001 BCSC 921 ["Alda Wholesale"],
3. Alda Wholesale, at para 39.
4. Alda Wholesale, at para 40.
5. Personal Property Security Regulation, BC Reg 227/2002 ["Regulation"] 11(1)(b) and (c).
6. Regulation 11(1)(a).
7. Alda Wholesale, at para 27.
8. Regulation 11(2).
9. Regulation 11(3).
10. Regulation 10.
11. BCPPSA s. 28(2).
12. Alda Wholesale, at para 30 and 36.
Is the Pre-registration of a Security Interest Possible in Québec?
By: Geneviève Cloutier
In certain provinces, the law specifically permits the registration of a security interest on collateral prior to the execution of the security agreement by the debtor. By way of example, pre-registration is permitted by the Personal Property Security Act13 and the Bank Act14 under certain conditions. However, lenders should be cautious when attempting to pre-register a hypothec in the province of Québec as neither the Regulation respecting land registration15 nor the Regulation respecting the register of personal and movable real rights16 provide for the pre-registration of hypothecs.
In fact, the Civil Code of Québec prevents the registration of an immovable hypothec prior to its signing, as it requires that a copy or authentic extract of the deed of hypothec be presented to the land registry office for registration. Following registration of the immovable hypothec, a copy of the deed constituting the hypothec is published in the land registry and becomes available to any third party. Therefore, the registration of a hypothec against an immovable property located in Québec, prior to its signing by the debtor, is clearly prohibited.
As to hypothecs on movable property, there is no specific requirement that obliges the presentation of the agreement constituting the hypothec for purposes of registration. However, the Regulation respecting the register of personal and movable real rights requires that the application for such registration contain, inter alia, the reference to the agreement constituting the security interest, including the date on which the agreement was signed and its place of signature. Therefore, one can reasonably infer that the possibility of registering a hypothec against movable property, prior to the signing of the agreement constituting such hypothec, is excluded.
However, in Mine Jeffrey Inc. (Arrangement of)17, the Superior Court of Québec suggested that it might be possible to pre-register a movable hypothec prior to its creation (prior to its signing) in the case of a security interest resulting from a leasing agreement ("crédit-bail"). This judgement has yet to be followed by other decisions in the province of Québec.
13. R.S.O. 1990, c. P-10, section 45(3).
14. S.C. 1991, c.46, section 427.
15. C.c.Q., r.6.
16. C.c.Q., r.8.
17. C.S. Saint-François, no. 450-05-005118-027, November 2, 2004, EYB-2004-79924, J.E. 2005-76 (C.S.) (obiter- paragraph 38).
The Importance of Documenting Shareholder Loans (Ontario)
By: Sean Morrison
Shareholders often overlook the need to properly document loan advances in their haste to provide funds to the company, without being aware of the significant consequences that can result. One such consequence arises from the provisions of the BIA18 which operate to allow the trustee in bankruptcy to reject proofs of claim where advances have not been properly documented or are structured in a manner that makes the advances appear like an equity injection. A recent Québec Court of Appeal decision addressed the potential pitfall arising from Section 139 of the BIA in the circumstances of undocumented shareholder loans.
In Doorcorp Installations19, the court examined the decision of a trustee to disallow a proof of claim tendered by Ballylickey Investments Inc. (Ballylickey), the sole shareholder of the bankrupt Doorcorp Installations Inc. (Doorcorp). Ballylickey had made advances to Doorcorp between 2006 and 2007 in a total amount of $1,762,500 and had submitted a proof of claim in the amount of $1,502,906.39. The complicating factor in this case was that there was no loan agreement or other documentation setting out the terms of the advances apart from a notation in Doorcorp's accounting records and financial statements stating that a portion of the funds were loans that were non-interest bearing and with no specific terms of repayment.
At issue was whether these amounts advanced by Ballylickey to Doorcorp should be considered to be (i) interest-free loans, in which case Ballylickey would be an unsecured creditor with the same ranking as other unsecured creditors of Doorcorp, (ii) capital contributions ranking subordinate to the unsecured creditors, or (iii) loans at a variable interest rate based upon the profits of Doorcorp which would constitute postponed claims within the meaning of Section 139 of the BIA20.
Section 139 of the BIA states:
Postponement of claims of a silent partner. - Where a lender advances money to a borrower engaged or about to engage in trade or business under a contract with the borrower that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the trade or business, and the borrower subsequently becomes bankrupt, the lender of the money is not entitled to recover anything in respect of the loan until the claims of all other creditors of the borrower have been satisfied.
Both the Québec Superior Court and the Québec Court of Appeal held that Section 139 could be applied in the absence of a formal contract as it is possible to infer from the conduct of the parties and the circumstances of each case whether or not the money advanced was intended to receive a return on investment similar in nature to participating in the profits of the bankrupt and therefore attracting the application of this Section.21 The main factors to consider in making this determination are whether or not the interest rate varies according to the profits of the borrower, and whether or not the absence of repayment terms and an interest rate likens the lender to a silent partner of the borrower.
The Court of Appeal however chose to interpret Section 139 narrowly, rejecting the broad interpretation utilized by the Superior Court. Justice Bouchard held that the fact that no term, interest rate, or repayment terms were documented was insufficient evidence to conclude that the advances were in fact capital injections. The fact that the loans were repayable once Doorcorp had taken the path to profitability did not make them loans with interest rates tied to profits.
The Court of Appeal ultimately held in favour of Ballylickey only with respect to an amount equal to $740,406.39 of its overall claim of $1,502,906.39. It would not be a surprise if this ruling is ultimately limited to its particular fact situation as much weight was given to the reference to those advances in the accounting records and financial statements.
However, there are four clear lessons to be learned from this case that can assist a shareholder lender to avoid facing the situation that Ballylickey found itself in:
- Have a written loan agreement or promissory note to document each advance. This will be the first line of defence against any claim that each advance was an investment.
- Set a clear interest rate that is in no manner linked or related to the profits of the company.
- Have clear repayment terms. Even if the repayment terms have to be amended at a later date, their existence can constitute clear evidence that the advance is to be repaid in the manner of a loan.
- Obtain a general security agreement to secure repayment of the advances. In addition to this further bolstering the evidence of the loan, registering a general security agreement under the PPSA will also place the lender in the position of a secured creditor, unlike Ballylickey who, even for the amounts that were not rejected, ranked as an unsecured creditor. The general security agreement can always be subordinated to the borrower's operating lender or other senior creditors.
If a shareholder lender is careful and follows the simple lessons outlined above, it will increase its chances of establishing the secured loan nature of an advance as well as its chances of avoiding an equity characterization that is subordinated to unsecured creditors in a bankruptcy.
18. Bankruptcy and Insolvency
Act, R.S.C. 1985, c. B-3, as amended [the
19. Installations Doorcorp Inc./Doorcorp Installations Inc.(syndic d'), 2012 QCCA 702 ["Doorcorp Installations"]
20. The description of the Court's statement of the issues is based upon an internal translation of the French language judgment
21. The description of the Court's holdings is based upon an internal translation of the French language judgment
BCPPSA Amendments Relating to Licences as Collateral Now in Force
By: Mike Todd
In an earlier edition of Fully Secured (December 14, 2011 – Volume 2, Number 4) we reported on pending amendments to the BCPPSA22, expanding the definition of the term "licence" and including a licence as an "intangible" to which the BCPPSA applies. Those amendments came into force on September 1, 2012, and as a result it is now easier in B.C. for the holder of a licence relating to personal property to offer its licence as collateral and for a lender to take enforceable security charging that licence. In particular, the definition of "licence" has been expanded to mean a grant of rights which entitles the holder of the rights to deal with or acquire personal property or provide services. Thus it now includes licences granted by a governmental authority, such as fishing, forestry and liquor licences, and non-governmental licences relating to personal property entered into between other parties.
22. Personal Property Security Act, RSBC 1996, c 359 ["BCPPSA"].
Ontario PPSA Creditor Protections Prevail in Cases of Unauthorized Asset Transfers
By: Richard Dusome
The Ontario Court of Appeal has recently confirmed that the protections established in the Ontario PPSA23 for secured creditors who are unaware of asset transfers made by their debtors prevail despite any loss incurred by a subsequent lender acquiring a security interest in the transferred asset.
In Lisec America24, there was a priority dispute over a piece of equipment (Machine A) between secured creditors of two related debtor companies. The first debtor (Barber Suffolk) had obtained financing for the acquisition of Machine A from Lisec America Inc. (Lisec). The second related debtor (Barber Glass) had obtained financing for the acquisition of other equipment (Machine B and Machine C) from Lisec. Lisec properly perfected its purchase money security interests with registrations against both Barber Suffolk and Barber Glass. Neither registration included a general collateral description on the financing statement.
Unfortunately Lisec was not aware that Barber Suffolk had sold its interest in Machine A to Barber Glass on the day of the original financing.
Shortly thereafter, Barber Glass arranged for additional financing from Roynat Capital Inc. (RCI). Prior to advancing, RCI requested that Lisec either confirm the scope of its security interest or, if the Lisec debt had been paid in full, register a discharge. As Lisec was still unaware of the transfer of Machine A from Barber Suffolk to Barber Glass, and wished to facilitate the RCI financing, Lisec discharged its registration against Barber Glass on the understanding that it would receive payment for Machine B and Machine C out of the proceeds of the new RCI financing. On the basis of the discharge, RCI advanced funds to Barber Glass and registered its security interest against all assets of Barber Glass, including Machine A.
Barber Glass subsequently went into receivership, and Machine A was included on the list of assets of Barber Glass to be sold. Upon receiving notice of this situation, Lisec filed a Financing Change Statement reflecting the transfer by debtor within 30 days of its learning of the transfer. Lisec brought an application to settle the priority dispute and to prevent Machine A from being sold in the receivership. Lisec argued that its original registration against Barber Suffolk continued to perfect its security interest in Machine A. On the other hand, RCI claimed that Lisec's registration against Barber Glass was broad enough to cover Machine A such that the discharge filed by Lisec caused Lisec's security interest in Machine A to become unperfected. The applications judge found in favour of RCI and Lisec appealed.
The Court of Appeal allowed the appeal and found in favour of Lisec. It confirmed that pursuant to Section 48(2) of the Ontario PPSA, the unknown transfer from Barber Suffolk to Barber Glass did not unperfect Lisec's PMSI in Machine A because Lisec had properly registered a financing change statement against Barber Glass within 30 days of learning of the transfer.25 In a very technical judgment, the Court examined the Ontario PPSA fundamentals of the granting of a security interest, attachment and perfection, and determined that Barber Glass had never granted a security interest to Lisec in Machine A that could have attached and been perfected by Lisec's registration against Barber Glass. The fact that Barber Glass ultimately became the owner of Machine A did not alter this result26. Rather, Lisec's security interest in Machine A was only perfected by its registration against Barber Suffolk. The Court found that the discharge of Lisec's registration against Barber Glass could not therefore adversely impact the operation of Section 48(2) in preserving the priority of Lisec's security interest in Machine A.
The Court also held that Lisec's registration against Barber Suffolk was a stand-alone registration that was not subsumed in its Barber Glass registration. The discharge of the Barber Glass registration did not take with it the discharge of the Barber Suffolk registration, and that discharge was found to be a red herring in the analysis.27 The Court observed that RCI was really in no worse position than it would have been if there had never been an intervening Lisec/Barber Glass registration revealed by its search.
23. Personal Property Security
Act, R.S.O. 1990, c. P. 10, as amended.
24. Lisec America, Inc. v. Barber Suffolk Ltd., 2012 ONCA 235, 347 D.L.R. (4th) 678 ["Lisec America"].
25. Lisec America, at page [D.L.R. 685].
26. Lisec America, at page [D.L.R. 688].
27. Lisec America, at page [D.L.R. 688].
Spotlight on Security Documents: Reflecting Your Subordination Agreement on the Ontario PPSA Register
By: Richard Dusome
Subordination agreements, inter-creditor agreements and priorities agreements come in a variety of forms (each, a Subordination Document). Although some are unilateral in nature with all subordination covenants granted in favour of one secured party, it is not uncommon for some Subordination Documents to feature mutual subordinations by multiple secured parties to the extent necessary to give effect to the different priority rankings over different assets that they have agreed upon.
Section 50 of the Ontario PPSA28 provides a useful tool to reflect on the Ontario PPSA register the existence of a subordination of rank pursuant to any Subordination Document. This section states that where a security interest is perfected by registration and that security interest has been subordinated by the secured party to any other security interest in the applicable collateral, a financing change statement may be registered at any time during the period that the registration of the subordinated interest is effective.29 Mechanically, the financing change statement is registered as an "Other" change to the subordinated creditor's registration (the Subordination FCS) and details of the subordination or the applicable Subordination Document are inserted in Lines 25 to 28 of that financing change statement, all in accordance with the terms of Section 12 of the Minister's Order.30
It should be noted that Section 50 is permissive rather than mandatory, so it is not necessary for every subordination or Subordination Document to be recorded. However, even if a senior secured creditor's filing appears on the Ontario PPSA register prior to that of the subordinate creditor, it may be a good idea to register a Subordination FCS against the registration held by the subordinate creditor. Although Subordination Documents will typically include a clause binding the successors and assigns of the subordinated creditor, the subordinated creditor may inadvertently or purposely fail to disclose the existence of the subordination to a potential assignee. The proposed assignee will however likely conduct an Ontario PPSA search to verify the existence of the registration, and in doing so will acquire actual knowledge of the existence of the Subordination Document. In most cases, the proposed assignee will make inquiries following its search as to the terms of that Subordination Document, which will typically include a series of covenants that extend beyond a simple subordination. Thus, registering a Subordination FCS might serve to avoid costly litigation with the assignee alleging that it was unaware of the subordination terms.
To facilitate the completion of the Subordination FCS, a clause can be added to the Subordination Document outlining the specific text of the description to be used in Lines 25 to 28 of the Subordination FCS, and authorizing the senior secured creditor's counsel to make the registration on behalf of the subordinated creditor. In this way, the senior creditor does not have to pursue the subordinated creditor post-closing, or obtain its further co-operation in order to complete the registration.
28. Personal Property Security Act,
R.S.O. 1990, c. P. 10, as amended ["Ontario
29. Ontario PPSA, Section 50.
30. Minister's Order made under the Ontario PPSA, dated June 5, 2007 [the "Minister's Order"]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.